This article was first published in the September UK edition of Accounting and Business magazine.
The momentum continues to roll forward. Corporate reporting is subtly evolving into a much more useful system. Narrative reporting has moved into centre-field. Strategy and business models are emphasised. Non-financial reporting is expanding its influence. The traditional finance-based information is seen as being less essential and less influential in the great scheme of things. The evolution of integrated reporting is bringing about a change in thinking all around the world.
This time it is different. In the past, people have tried to bring about change by imposing yet another grid upon the process. This time we are seeing cultural change. And that is very different. It reflects what people want rather than what someone thinks they ought to want. ‘We seem to be running with the grain of what preparers, users, regulators and investors want,’ says Jonathan Labrey, communications director at the International Integrated Reporting Council (IIRC), as he reflects on the mass of responses to the latest proposals for an integrated reporting framework. ‘Most people are sold on the concept and the value it can bring.’
It is the central issue of value that has brought about the change. The financial crisis was perceived as being based on the financials, which were, in many cases, found wanting. Now the world wants to view what a company or organisation is about from a much wider variety of angles.
‘I think there has been a step change,’ says Jennifer Harrison, head of external reporting at communications giant BT, ‘a really dramatic shift towards companies communicating that they are responsible companies.’ And at the recent annual Non-Financial Reporting Conference, organised by Global Reporting Initiative training partner Lodestar working with Deloitte and ACCA, ACCA chief executive Helen Brand announced that ‘non-financial reporting is entering a golden age’.
Indications that this is so are everywhere. There is a growing global movement towards support for the now famed Paragraph 47 from last year’s Rio Earth Summit, which advocated the embedding of sustainability into companies’ reporting cycles. The European Commission and the UK’s Department for Business, Innovation & Skills have both introduced measures that mandate further non-financial reporting disclosure.
On the corporate front, companies everywhere are trying to expand the non-financial information they provide and enhance its relevance and usefulness. ‘Companies,’ says Sallie Pilot, director at the global reporting consultancy Black Sun, ‘are defining what their purpose is in society.’
This gradual but accelerating expansion into new and sometimes sparsely charted territories will bring, as integrated reporting suggests, experimentation. And the gathering and publication of non-financial information may not be plain sailing. ‘The robustness of the measurement and the consistency of the measurement will have companies scratching their heads for some time,’ says Harrison.
Much other work will have to be done to capture the real long-term benefits of all this cultural change. ‘The overall financial reporting is only one part of the journey,’ says David Allen, CFO at engineering project Crossrail. ‘There is a lot of work to be done in upskilling financial professionals. Modelling the reporting of forecast information is a complex task. Add in non-traditional and non-financial information, and you are adding further complexity. It is very hard to quantify that you are doing the right thing.’
But anecdotally it is plain that there is a huge amount of innovation already going on. And there is a steady expansion into the new fields and new ideas that a sustainability-focused finance function can encourage.
Some innovative investment companies are basing their decisions on the efficiency of companies when it comes to sustainability, rather than the old tradition of purely financial measures and ratios. Finance functions are finding that ignoring the traditional view that lowest cost is the only way to go when investing in future projects is not only more productive but can be astonishingly lucrative as a result of savings across the longer term. Insisting that suppliers are diverse and sustainable can produce changes in attitude, both internally and externally, which benefit both sides of the old divide. Equally, collaboration with unlikely allies in expanding the business can prove surprisingly effective.
In all of these the finance function is discovering new skills and new ways of applying its fundamental understanding of the company as a whole. It is, as Brand pointed out at the Non-Financial Reporting Conference, ‘all about joining the dots’. ‘It is,’ as she went on to say, ‘not non-financial reporting. It is complete reporting.’
There is a new-found freedom in an increasing number of finance functions. The reporting world is undergoing a widespread and now deeply rooted change. And it has mostly come from within. ‘The power of corporate voluntary effort should be applauded,’ as Russell Picot, group chief accounting officer at global bank HSBC, put it at the conference.
But voluntary may not sit well when it comes to assurance and regulation further down the line. Where the problems may arise is where the new push for broader reporting, and integrated reporting in particular, may intersect with the regulators around the world. ‘The complexity of the regulatory landscape is very important,’ says Labrey.
The problem is not just the different regulatory requirements and objectives. It is that regulation itself acts as a disincentive to the very idea of change. ‘Because regulation is so much about compliance, the mindset is not to innovate,’ says Labrey. With a much wider reporting model coming into being it is important that it is allowed to evolve.
‘Our big challenge is to see that regulators understand that it is not about a mandatory requirement and, as integrated reporting is the future, regulators need to ensure there aren’t regulatory barriers to implementation and experimentation,’ he adds.
With so much change coming about right across the reporting world, it is important to safeguard integrated reporting’s role as the prime catalyst. ‘The stars are all aligning,’ says Pilot, ‘and that will drive change.’
Robert Bruce is an accountancy commentator and journalist